March 4, 2006

Get expert advice for estate planning

Transferring
property to children is fraught with issues

A mother and daughter came into my office last week to talk about ownership of
the family home. The mother, who is in her 70s, did not want the children to get
stuck with the 1-per-cent Ontario probate fees on her death.

She asked me to prepare a deed putting the property into joint names with
her four adult children. That way the children would automatically become the
owners of the house without the necessity of applying to court for probate now
known as a court certificate of appointment of estate trustee.

I explained to her that although the children would save perhaps $4,000
in what amounts to an Ontario death tax, she might live to a ripe old age and in
the meantime, registering the property in all five names could have unintended
consequences.

I told her that during her lifetime:

Her family home would be exposed to the creditors of her adult children if
they got sued or filed for bankruptcy.

If she needed to sell the house and one or more of the children refused, she
might not have the necessary funds to pay for her retirement needs.

If any of the children became involved in a matrimonial dispute, his or her
share in the house could be the subject of bitter and expensive litigation for
all parties.

Any of her children could become tempted to pressure the mother to sell her
house, against her will, so she could distribute the proceeds to the children
while she was alive.

After some discussion, the mother changed her mind and decided to leave
the ownership of the house in her name only.

The fact is that putting a family home or other assets into the name of
the children during the lifetime of the parent can create unintended and unhappy
consequences.

That's exactly what happened in the case of Pecore v. Pecore, heard by
the Ontario Court of Appeal last year.

Edwin Hughes had been a miner in Timmins for most of his life. Before he
died in 1998, he had amassed assets worth about $1.2 million. He had been
advised that his estate could save significant probate fees on his death if he
transferred ownership of those assets to himself and his daughter Paula Pecore.

As a result, in 1994 he started transferring most of his investments into
joint ownership with Paula. Two years later, Hughes was advised that this type
of transfer could trigger a capital gains tax on the profit on Paula's "half" of
the assets.

Since that was not his intention, he wrote letters to the financial
institutions holding his investments stating that he did not intend to trigger
any capital gains, that the funds were not being gifted to Paula, and that the
ownership change was being registered for probate purposes only.

Shortly before his death, Hughes signed a will dividing his estate
equally between Paula and her husband Michael Pecore. When her father died,
Paula redeemed the investments which became her property as a result of the
joint names registration.

Two years later, Paula and Michael separated and Michael started divorce
proceedings. When he discovered that he had been named beneficiary of half of
his father-in-law's estate, he sued Paula for his share.

Both the trial court and the court of appeal ruled the father had made a
gift of the investments to his daughter. They came to this conclusion even
though the father had written the financial institutions stating that the
transfers were not gifts, in order to ensure that he did not suffer tax
consequences on the change of ownership.

The appeal court said that there was no evidence Hughes intended to evade
taxes illegally. That, the court said, was a matter between the father's estate
and the tax department, not a matter between his daughter and the estranged
son-in-law. Michael was cut out of the estate.

Commenting on the Pecore decision in a recent edition of Money &
Family Law, Toronto estates lawyer Barry Corbin wrote that when a parent is
transferring assets to a child for estate purposes, the child should sign a
declaration confirming that he or she is not acquiring real ownership but only
paper title.

The flip side of this, however, is that in the event probate is
necessary, the probate fees will be the same as if title had not been
transferred.

Corbin also notes that the parent who intends to make an actual current
gift of a share of property must suffer the tax consequences of the gift. Except
for a principal residence that is exempt from capital gains tax, a
parent-to-child gift is viewed by the tax people in Ottawa as a sale at fair
market value with all the resulting tax consequences.

Finally, Corbin notes that Hughes was one of the many individuals who
believe it is possible to avoid both current income taxes and future probate
fees by transferring property into joint ownership with a child with the child
having no rights in the property until the parent dies.

In that scenario, it is not possible to prevent the transferred property
from falling into the individual's estate, as a matter of succession law.

For aging parents, the bottom line is that transferring ownership of
property and investments into joint names with a child or children is fraught
with complexities and tax issues. It's important to get professional advice from
a lawyer or accountant before making any transfers of this kind.

CLARIFICATION: In last week's Title Page column, I reported that Ontario
Superior Court Justice John Jenkins criticized the lawyer for Andrea
Edwards-DeCoito for failing to protect his client by obtaining a closing date
extension for her house purchase. As a result, the builder cancelled the deal
and resold the property. Harvey J. Ash was the successful lawyer for
Edwards-DeCoito at trial. He was not her real estate lawyer in the aborted
transaction.

Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.Visit the Toronto Star column archives at http://www.aaron.ca/columns for articles on this and other topics or his main webpage at www.aaron.ca.